INTERCOMPANY TRANSACTIONS - John Wiley & Sons

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EXERCISE 4-3 EXERCISES 189
EXERCISE 4-4
EXERCISE 4-5 Required:
EXERCISE 4-6 A. Prepare the intercompany inventory worksheet elimination needed to present consolidated financial

statements on December 31, 2005.
B. Carp and Sunfish had operating income of $250,000 and $90,000, respectively, in 2005.

Determine consolidated net income for 2005.
C. Prepare the intercompany inventory worksheet elimination needed to present consolidated financial

statements on December 31, 2006, assuming that Sunfish sold an additional 45 percent of the
inventory purchased from Carp to unrelated parties for $32,000.
D. How would the solution to part C change if the sales price to the unrelated parties is $35,000.

Bear Manufacturing sells 4,000 units of inventory to Cub Enterprises, its subsidiary, for $7 each in
2005. The inventory had a cost basis to Bear of $5 each at the time of the sale. Cub sells 1,500 units
of the inventory purchased from Bear to unrelated parties for $11 each before year-end. Bear owns
70 percent of Cub’s stock.

Required:
A. Prepare the intercompany inventory worksheet elimination needed to present consolidated financial

statements on December 31, 2005.
B. Prepare the intercompany inventory worksheet elimination needed to present consolidated financial

statements on December 31, 2006, assuming that Bear sold an additional 5,000 units of inventory
(cost $6 each) to Cub for $9 each during 2006. Also assume that Cub sells 5,500 units to
unrelated parties for $14 each before year-end and that a FIFO flow is used for inventory
transactions.

Pokers Unlimited, a 60 percent–owned subsidiary, sold inventory costing $150,000 to its parent,
Fireplace Fixtures, for $200,000 in 2005. Fireplace sold 15 percent of this inventory to unrelated
parties in 2005 for $35,000. Fireplace sold an additional 80 percent of the inventory to unrelated
parties in 2006 for $180,000.

Required:
A. Prepare the intercompany inventory worksheet elimination needed to present consolidated financial

statements on December 31, 2005, and December 31, 2006.
B. Fireplace had operating income of $480,000 and $525,000 in 2005 and 2006, respectively. Pokers

had operating income of $90,000 and $110,000 in 2005 and 2006, respectively. Determine con-
solidated net income for 2005 and 2006.
C. Assuming there are no other intercompany transactions, what is the amount of adjustment
to noncontrolling interest in the 2007 worksheet elimination for intercompany inventory
transactions?

Broadcasting Enterprises purchased $100,000 of inventory from its subsidiary, Cable Company,
when the inventory was carried on the financial records of Cable for $75,000. Broadcasting sold 60
percent of this inventory to unrelated parties during the same period for $70,000. During the period,
Broadcasting recorded sales and cost of goods sold of $2,500,000 and $1,500,000, respectively.
Also, Cable recorded sales and cost of goods sold of $850,000 and $400,000, respectively.
Broadcasting owns 90 percent of Cable’s stock.

Required:
A. Prepare the intercompany inventory worksheet elimination needed to present consolidated financial

statements.
B. Determine the amounts that would be presented on the consolidated income statement as Sales

and Cost of Goods Sold.
C. What are the worksheet elimination adjustments to Retained Earnings and Noncontrolling

Interest (if applicable) in the next period regarding the above intercompany inventory
transaction?

Sanderson Company is a 75 percent–owned subsidiary of Flip, Incorporated. Sanderson regularly
supplies Flip with one of the main raw materials for Flip’s manufacturing process. The information
below summarizes recent intercompany sales activity between the two companies.

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190 CHAPTER 4 INTERCOMPANY TRANSACTION

January 1, 2005 Units Sold Intercompany Units Cost per Intercompany
2005 activity to Flip on Hand at Flip Unit Markup per Unit
December 31, 2005
2006 activity — 0 — —
December 31, 2006 70,000 — $11.00 $6.00
22,000 $11.00 $6.00
— — $12.00 $6.50
80,000 15,000 $12.00 $6.50

—

Required:
A. Prepare the intercompany inventory worksheet elimination needed to present consolidated finan-

cial statements at December 31, 2005.
B. Prepare the intercompany inventory worksheet elimination needed to present consolidated finan-

cial statements at December 31, 2006.
C. Assume that Flip holds some inventory acquired from Sanderson at January 1, 2005. Rework

parts A and B to reflect the information set above with the change in information outlined
below.

January 1, 2005 Units Sold Intercompany Units Cost per Intercompany
to Flip on Hand at Flip Unit Markup per Unit

— 10,000 $10.00 $4.00

EXERCISE 4-7 D. Explain your answers for 2005 and 2006 in part C regarding where and why the answers change and
EXERCISE 4-8 do not change.

Furniture Enterprises owns 80 percent of Cushion Company’s stock and 60 percent of Pillow
Corporation’s stock. Cushion sold inventory costing $60,000 to Pillow for $75,000 in 2005. Pillow
did not sell any of this inventory to unrelated parties during 2005.

Required:
A. Prepare the intercompany inventory worksheet elimination needed to present consolidated financial

statements in 2005.
B. Prepare the intercompany inventory worksheet elimination needed to present consolidated financial

statements in 2006 assuming that Pillow sold 70 percent of the inventory purchased from
Cushion to unrelated parties for $58,000.
C. Assume that Furniture had operating income of $380,000 in 2005 and $415,000 in 2006;
Cushion had operating income of $67,000 in 2005 and $80,000 in 2006; and Pillow had oper-
ating income of $93,000 in 2005 and $85,000 in 2006. Determine consolidated net income in
2005 and 2006.
D. How would part A change if Pillow had sold 40 percent of the inventory purchased from Cushion
in 2005?

Apex Monitors purchased inventory from Delta Keyboards for $179,200 in 2005. The inventory had
a carrying value on Delta’s books of $140,000 at the time of the sale. Apex sold 65 percent of this
inventory to unrelated parties in 2005 for $135,000. The remainder of this inventory was sold to
unrelated parties in 2006 for $67,000. Computer Unlimited owns 70 percent of Apex’s stock and 90
percent of Delta’s stock. Apex, Delta, and Computer had sales and cost of goods sold in 2005 and
2006 as follows.

Sales Cost of Goods Sold

2005 2006 2005 2006

Apex $1,000,000 $1,130,000 $470,000 $510,000
Delta 3,365,000 2,840,000 1,346,000 1,280,000
Computer 4,200,000 6,300,000 2,700,000 3,100,000

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EXERCISE 4-9 EXERCISES 191
EXERCISE 4-10
EXERCISE 4-11 Required:
A. Prepare the intercompany inventory worksheet elimination needed to present consolidated finan-

cial statements in 2005 and 2006.
B. Determine the amounts that would be presented on the consolidated income statement as Sales

and Cost of Goods Sold for 2005 and 2006.
C. Assuming Apex and Delta had operating income in 2005 of $95,000 and $210,000, respectively,

and there are no other intercompany transactions, what is the income to noncontrolling interest
for each company in 2005?

National Corporation sold equipment to Local Company on December 31, 2005, for $24,000. The
equipment was carried on the financial records of National at a cost of $66,000, and accumulated
depreciation was $44,000 at the time of the sale. The equipment had an estimated remaining life of
two years on the records of National and was assigned an estimated remaining life of four years
when purchased by Local. Straight-line depreciation is used by National and Local. National owns
100 percent of Local’s stock.

Required:
A. Prepared the intercompany asset transaction worksheet elimination needed to present the

consolidated financial statements in 2005.
B. What would be presented on National’s income statement, Local’s income statement, and the

consolidated income statement for depreciation expense for 2005?
C. Prepare the intercompany asset transaction worksheet elimination needed to present the consol-

idated financial statements in 2005, assuming all the values in the problem exist at January 1,
2005.
D. How would the use of a different depreciation method impact the worksheet elimination prepared
in parts A and C above?

Small Change Corporation, an 80 percent–owned subsidiary, purchased a building from its parent,
Big Bucks Enterprises, for $264,000 on January 1, 2005. The building had a historical cost and
accumulated depreciation on Big Bucks’ books at the time of the sale of $500,000 and $300,320,
respectively. The building had an estimated remaining life of 8 years on the financial records of Big
Bucks and was assigned a new estimated life of 20 years when purchased by Small Change. Big
Bucks and Small Change both calculate depreciation using the straight-line method.

Required:
A. Prepare the intercompany asset transaction worksheet elimination needed to present the consol-

idated financial statements in 2005, 2006, and 2007.
B. Assume that Big Bucks has operating income of $675,000 in 2005 and $729,000 in 2006, while

Small Change has operating income of $290,000 in 2005 and $326,000 in 2006. Determine con-
solidated net income assuming that there are no other intercompany transactions in 2005 and
2006.
C. What would be recognized as consolidated depreciation expense in 2005 and 2006 if the sale had
occurred on May 1, 2005, assuming all the values in the problem exist at May 1, 2005?

Engine Manufacturing Corporation acquired a machine from Piston-Ring Company, its 80 per-
cent–owned subsidiary, for $120,000 on January 1, 2005. The machine had a historical cost of
$675,000 and accumulated depreciation of $525,000 in Piston-Ring’s financial records at the date of
the sale. Piston-Ring was depreciating the machine at a rate of $75,000 per year. Engine assigns the
machine a three-year estimated life at the date of purchase.

Required:
A. Prepare the intercompany asset transaction worksheet elimination needed to present the consol-

idated financial statements in 2005 and 2006.
B. Write a brief explanation of the 2006 worksheet elimination prepared in part a.
C. Assume that Engine has operating income of $1,740,000 and Piston-Ring has operating income

of $580,000 in 2005. Determine consolidated net income for 2005.

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192 CHAPTER 4 INTERCOMPANY TRANSACTION

EXERCISE 4-12 Little Exposure Insurance sells a building with a historical cost of $1,180,000 and accumulated
EXERCISE 4-13 depreciation of $388,000 to Mega Insurance Company on January 1, 2005 for $1,008,000. Little
EXERCISE 4-14 Exposure had assigned the building a 15-year estimated life at the date it was originally purchased.
EXERCISE 4-15 Mega assigns the building an estimated remaining life of 12 years when it is acquired from Little
Exposure. Mega owns 90 percent of Little Exposure’s stock.

Required:
A. Prepare the intercompany asset transaction worksheet elimination needed to present the consolidated

financial statements in 2005.
B. What amount of income would be allocated to noncontrolling interest if Little Exposure has

operating income of $750,000 and there are no other intercompany transactions?
C. Assuming there are no other intercompany transactions, what would be the adjustment to

noncontrolling interest in the 2006 intercompany asset transaction worksheet elimination?

Baseball Company sells a machine to Bowling Shoe Enterprises on March 31, 2006, for $120,000.
The machine has a historical cost and accumulated depreciation of $160,000 and $46,000, respectively,
on Baseball’s books at the date of the sale. The machine had a remaining life of 40 months on
Baseball’s books at the date of sale and was assigned an estimated remaining life of 60 months when
purchased by Bowling Shoe. Ultimate owns 80 percent of Baseball’s stock and 75 percent of
Bowling Shoe’s stock.

Required:
A. Prepare the intercompany asset transaction worksheet elimination needed to present the consolidated

financial statements in 2006.
B. How would the solution to part A be different if the buyer had been Ultimate rather than Bowling

Shoe?
C. How would the solution to part A be different if the seller had been Ultimate rather than

Baseball?
D. Assume that Baseball has operating income of $360,000 and Bowling Shoe has operating income

of $285,000. What is the amount of income allocated to the noncontrolling interest of Baseball
and Bowling Shoe on the consolidated income statement if there are no other intercompany trans-
actions?

Oil Rig Enterprise (a 60 percent–owned subsidiary of Huge Oil Company) buys a building from
Pipeline Pumps Company (a 90 percent–owned subsidiary of Huge Oil Company) for $6,300,000 on
June 1, 2006. The building is assigned an estimated life of 21 years when purchased. The building
has a historical cost and accumulated depreciation of $8,400,000 and $1,596,000, respectively, on
Pipeline Pumps’ books when the building is sold. Annual depreciation on the books of Pipeline
Pumps for years before the sale was $285,000.

Required:
A. Prepare the intercompany asset transaction worksheet elimination needed to present the consolidated

financial statements in 2006 and 2007.
B. Assume that Huge Oil had operating income of $8,150,000 in 2006 and $9,200,000 in 2007, Oil

Rig had operating income of $1,550,000 in 2006 and $1,700,000 in 2007, and Pipeline Pumps
had operating income of $955,000 in 2006 and $875,000 in 2007. Determine consolidated net
income in 2006 and 2007.
C. Determine consolidated depreciation expense in 2006 and 2007.
D. Assume that Oil Rig sells the building to an unrelated party on October 1, 2007, for $6,000,000.
Prepare the worksheet elimination needed to present the consolidated financial statements in
2007.

Eagle Corporation issues a 20-year, $500,000, 12-percent bond payable on January 1, 2001, for
$423,200. The discount on bonds is amortized using the straight-line method. Sparrow Enterprises,
a 75 percent–owned subsidiary of Eagle, purchased $50,000 of the bond as an investment from an
unrelated party on June 1, 2006, for $43,000.

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EXERCISE 4-16 EXERCISES 193
EXERCISE 4-17
EXERCISE 4-18 Required:
A. Prepare the indirect intercompany debt transaction worksheet elimination needed to present the
EXERCISE 4-19
consolidated financial statements in 2006 and 2007.
B. Assuming that Sparrow has operating income of $145,000 for 2006 and no other intercompany

transactions have occurred, what is the amount of income allocated to noncontrolling interest?
C. Determine consolidated interest expense for 2006.

Commuter Airways purchases Big Plane Airline’s bond from an unrelated party as an investment
for $66,000 on December 1, 2006. The bond has a face value of $60,000, a stated interest rate of
12 percent, and a remaining life of five years. The bond was originally issued for $87,000 and has a
carrying value on the issuer’s books of $64,500 at the date purchased by Computer. Big Plane owns
80 percent of Commuter’s stock. The straight-line method is used to amortize premiums.

Required:
A. Prepare the indirect intercompany debt transaction worksheet elimination needed to present the

consolidated financial statements in 2006 and 2007.
B. Determine the date of the original bond issuance.
C. Determine the amount of interest revenue and interest expense to be recognized on the consolidated

income statements in 2006 and 2007.

Porpoise Products issued, for $281,800, a 10-year, $250,000, 12 percent bond payable on May 1,
2003. On September 1, 2005, Orka Enterprises acquired $150,000 of this bond from an unrelated
party for $181,280. The premium is amortized using the straight-line method. Orka owns 75 percent
of Porpoise’s stock.

Required:
A. Prepare the indirect intercompany debt transaction worksheet elimination needed to present the

consolidated financial statements in 2005 and 2006.
B. Determine the amount of interest expense to be recognized on the 2005 consolidated income

statement.
C. Assume that Orka has operating income of $650,000 and pays dividends of $150,000 in 2005

while Porpoise has operating income of $400,000 and pays dividends of $90,000. Determine the
income allocated to noncontrolling interest.
D. How would the income to noncontrolling interest change if the dividends paid by Porpoise were
$120,000 rather than $90,000?

Little Magazine Enterprises is an 80 percent owned subsidiary of Big Book Company. Big Book
Company purchased $1,000,000 of Little Magazine’s outstanding bonds payable from an unrelated party
for $1,070,215 on March 31, 2006. The bonds were initially issued by Little Magazine on November 1,
1998, for $1,044,400. At the date of issuance the bonds had a 10 percent stated interest rate. The
premium is being amortized straight-line on Little Magazine’s books at a rate of $185 per month.

Required:
A. Prepare the indirect intercompany debt transaction worksheet elimination needed to present the

consolidated financial statements in 2006 and 2007.
B. What is the amount of the adjustment to noncontrolling interest that would appear in the 2008

worksheet elimination for the indirect intercompany debt transaction?
C. Determine the amount of interest revenue and interest expense recognized on the 2006 and 2007

consolidated income statements.
D. Determine 2006 consolidated net income based on the assumption that Big Book has operating

income of $2,650,000, Little Magazine has operating income of $1,100,000, and there are no
other intercompany transactions.
E. How would the existence of a $10,000 increase in depreciation expense resulting from a purchase
differential on equipment impact the worksheet elimination for this indirect intercompany debt
transaction?

Syracuse Company, a 75 percent–owned subsidiary of Phoenix Enterprises, issued $500,000,
10-year, 9 percent bonds payable to unrelated parties on January 1, 2006, for $516,800. Toledo

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194 CHAPTER 4 INTERCOMPANY TRANSACTION

Corporation, a 90 percent–owned subsidiary of Phoenix, acquires $200,000 of these bonds from an
unrelated party on August 31, 2006, for $213,104. Syracuse and Toledo both amortize premiums
using the straight-line method.

EXERCISE 4-20 Required:
A. Prepare the indirect intercompany debt transaction worksheet elimination needed to present the

consolidated financial statements in 2006 and 2007.
B. Determine the 2007 consolidated net income if Phoenix has operating income of $750,000,

Syracuse has operating income of $300,000, and Toledo has operating income of $220,000.
C. Determine the adjustment to noncontrolling interest in the 2008 worksheet elimination for the

indirect intercompany debt transaction.

Basket Company purchased $300,000 of the bonds payable of Nylon Rope Enterprises from an
unrelated party on October 1, 2005, for $263,600. These bonds had originally been issued by Nylon
Rope for $246,000 on February 1, 2000. The bonds have a stated interest rate of 12 percent and an
original life of 15 years. The discount on the bonds is amortized using the straight-line method.
Basket is a 70 percent–owned subsidiary of Hot Air Balloon Corporation, while Nylon Rope is an
80 percent–owned subsidiary of Hot Air Balloon.

Required:
A. Prepare the indirect intercompany debt transaction worksheet elimination needed to present the

consolidated financial statements in 2010 and 2011.
B. Determine the interest expense recognized on the 2010 consolidated income statement related to

these bonds.
C. Determine the 2010 income allocated to noncontrolling interest assuming that there are no other

intercompany transaction and that Basket has operating income of $170,000 and Nylon Rope has
operating income of $225,000.

PROBLEMS

Intercompany Percent Transaction Year of Description of Other Factors
Transaction Owned Type Consolidation
Continuation of Problem 4-1
Number Direction 75 Inventory First Continuation of Problem 4-2
75 Inventory Second Mid-year acquisition
4-1 Both 75 Inventory Continuation of Problem 4-4
4-2 Both 60 Inventory Third Continuation of Problem 4-5
4-3 Both 60 Inventory First Mid-year sale of asset, negative goodwill,
4-4 Both 60 Inventory Second
4-5 Both 80 Plant Assets Third separate accumulated depreciation accounts
4-6 Both First Continuation of Problem 4-7, end-of-year
4-7 Down
upstream sale of plant asset
4-8 Both 80 Plant Assets Second Continuation of Problem 4-8, sale to unrelated

4-9 Both 80 Plant Assets Third party of downstream asset in Problem 4-7
Mid-year acquisition, separate accumulated
4-10 Down 100 Plant Assets First
depreciation accounts, mid-year sale of asset
4-11 Both 100 Plant Assets Second Continuation of Problem 4-10, sale to unrelated

party of downstream asset in Problem 4-10,
mid-year upstream and end-of-year downstream
downstream sale of plant asset

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Number Intercompany Transaction Year of PROBLEMS 195
Transaction Percent Type Consolidation
Direction Owned Description of Other Factors
Plant Assets Third
4-12 Both 100 Continuation of Problem 4-11, mid-year
upstream sale of plant asset, sale to
4-13 Down 100 Debt First unrelated party of upstream asset in
4-14 Down 100 Debt Second Problem 4-11
4-15 Down 100 Debt
4-16 Both Third Mid-year acquisition
4-17 Both 80 Debt Continuation of Problem 4-13
80 Debt First Continuation of Problem 4-14, additional
4-18 Both Second
downstream intercompany debt purchased
4-19 Both 80 Debt Third Beginning-of-year acquisition
Continuation of Problem 4-16, additional
4-20 Both 80 Inventory, First and
4-21 Both Plant Asset, Second downstream and upstream intercompany
and Debt debt purchased
Continuation of Problem 4-17, retirement of
100 Inventory First, second, upstream intercompany debt purchased in
Problem 4-16
and third Beginning-of-year acquisition, separate
accumulated depreciation account, upstream
60 Plant Asset First, second, inventory, downstream plant assets, down
and third stream debt in year 1, additional upstream
inventory in year 2
4-22 Up 60 Debt First, second, Beginning-of-year acquisition, upstream and
downstream inventory in each year
and third Mid-year acquisition, separate accumulated
depreciation accounts, upstream and down
stream plant asset in each year, downstream
sale in year 1 is sold to unrelated party in
year 3 and upstream sale in year 2 is sold to
unrelated party in year 3
Beginning-of-year acquisition, upstream debt
in each year, debt acquired in year 1 is retired
retired by subsidiary in year 2

PROBLEM 4-1 Penman Corporation acquired 75 percent of Shedd Industries’ stock on January 1, 2005, for
$1,647,750. The balance sheets for Penman and Shedd and market value information at the date of
acquisition are presented below.

Penman Corporation Shedd Industries

Book Value Market Value Book Value Market Value

Cash $ 250,000 $ 250,000 $ 82,000 $ 82,000
Receivables 350,000 350,000 140,000 140,000
Inventory 800,000 875,000 260,000 300,000
Investment in Shedd
Land 1,650,000 1,650,000 431,000 481,000
Buildings (net) 1,100,000 1,600,000 900,000 872,000
Equipment (net) 3,750,000 3,850,000 387,000 450,000
Patents 1,660,000 2,400,000

Total Assets 165,000 320,000

$9,725,000 $2,200,000

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196 CHAPTER 4 INTERCOMPANY TRANSACTION

Current Liabilities $ 650,000 600,000 $ 200,000 200,000
Bonds Payable 2,000,000 2,100,000
Premium on Bonds Payable 600,000
Common Stock 50,000 850,000
Additional Paid-In Capital 1,450,000 550,000
Retained Earnings 3,050,000 $2,200,000
2,525,000
Total Liabilities and Equity $9,725,000

The estimated remaining life (in years) of each item with a purchase differential is listed below.

Inventory Penman Shedd
Land
Buildings 1 1
Equipment Indefinite Indefinite
Patents
Current Liabilities 15 7
Bonds Payable 5 9
8
1

10

Throughout the year Shedd sold inventory to Penman for a total of $96,000. The inventory sold to
Penman was carried on Shedd’s books at $80,000 at the time of the sale. Seventy percent of this
inventory was sold by Penman to unrelated parties during 2005 for $76,000. Near the end of 2005,
Penman sold inventory costing $40,000 to Shedd for $46,000. Shedd did not sell any of this inventory
to unrelated parties during 2005.

Abbreviated income statements for Penman and Shedd for 2005 are provided below.

Sales Penman Corporation Shedd Industries
Cost of Goods Sold
$3,500,000 $700,000
Gross Profit 2,275,000 285,000
Depreciation Expense 1,225,000 415,000
Other Expenses 425,000 86,000
200,000 109,000
Income Before Taxes 600,000 220,000
Income Taxes 180,000 60,000
$420,000 $160,000
Net Income

PROBLEM 4-2 Dividends in 2005 for Penman and Shedd were $230,000 and $90,000, respectively.

Required:
Prepare, in journal entry form, the worksheet eliminations needed to present the consolidated financial
statements at December 31, 2005.

(Refer to the information in Problem 4-1.) During 2006, Shedd sold additional inventory to Penman
for $130,000. Shedd originally paid $105,000 for this inventory. Penman sold all the remaining
inventory purchased from Shedd during 2005 to unrelated parties and 80 percent of the inventory
purchased during 2006 for $150,000.
Penman sold $82,000 of additional inventory to Shedd during 2006. This inventory was carried
on Penman’s books for $68,000 at the time of sale. Shedd sold 90 percent of the inventory
purchased from Penman during 2005 and 30 percent of the inventory purchased during 2006 for
$73,000.
Penman’s net income and dividends paid during 2006 are $550,000 and $260,000, respectively,
while Shedd’s net income and dividends paid are $210,000 and $100,000, respectively.

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PROBLEM 4-3 PROBLEMS 197
PROBLEM 4-4
Required:
PROBLEM 4-5 Prepare, in journal entry form, the worksheet eliminations needed to present the consolidated financial
statements at December 31, 2006.

(Refer to the information in Problems 4-1 and 4-2.) Penman recorded net income of $675,000 and
paid $300,000 of dividends during 2007, while Shedd recorded net income of $250,000 and paid
$110,000 of dividends. Shedd sold $160,000 (cost) of inventory to Penman for $225,000 during
2007, while Penman sold $92,000 (cost) of inventory to Shedd for $115,000. During 2007, Penman
sold an additional 10 percent of the inventory purchased from Shedd in 2006 to unrelated parties for
$16,000. In addition, Penman sold 60 percent of the inventory purchased from Shedd in 2007 to
unrelated parties for $147,000. Shedd sold all the remaining inventory purchased from Penman in
2005 to unrelated parties during 2007. Shedd also sold, to unrelated parties, an additional 40 percent
of the inventory purchased from Penman during 2006 and 70 percent of the inventory purchased dur-
ing 2007. Total sales by Shedd to unrelated parties are $131,000.

Required:
Prepare, in journal entry form, the worksheet eliminations needed to present the consolidated financial
statements at December 31, 2007.

Cardinal Corporation purchased 60 percent of Bishop Company March 31, 2005, for $15,078,000.
The balance sheet of Bishop Company on that date follows.

Cash $2,600,000 Accounts Payable $1,500,000
Marketable Securities 1,200,000 Notes Payable (short-term) 3,300,000
Accounts Receivable 5,750,000 Notes Payable (long-term) 1,400,000
Inventory 8,260,000 Bonds Payable 10,000,000
Land 750,000 Discount on Bonds Payable
Buildings (net) 6,300,000 Common Stock (65,000)
Equipment (net) 850,000 Additional Paid-In Capital 350,000
Copyrights 200,000 Retained Earnings 4,150,000
5,275,000
Total Assets $25,910,000 Total Liabilities and Equity
$25,910,000

Purchase differentials exist for three identifiable assets: land, buildings, and copyrights. The amounts
of the purchase differentials applicable to Cardinal’s ownership percentage are $648,000,
$1,800,000, and $2,565,000, respectively. The remaining estimated life of the buildings is 10 years
and the copyrights have an estimated remaining life of 25 years.

Bishop Company records net income of $3,000,000 for the last nine months of 2005 and pays
$600,000 in dividends quarterly (three dividend payments were made after the acquisition). In addition,
Cardinal records $4,500,000 net income and pays $1,000,000 of dividends in 2005.

Cardinal sold $2,400,000 of inventory to Bishop in 2005 for $2,850,000. Bishop sold 75 percent of
this inventory to unrelated parties during 2005. Also in 2005, Bishop sold inventory costing $780,000
to Cardinal for $875,000. Cardinal resells 40 percent of this inventory to unrelated parties before the
end of 2005.

Required:
Prepare, in journal entry form, the worksheet eliminations needed to present the consolidated financial
statements at December 31, 2005.

(Refer to the information in Problem 4-4.) Bishop Company had net income of $4,200,000 and paid
dividends of $2,700,000 in 2006.
During 2006, Cardinal sold inventory to Bishop for $2,900,000. The inventory cost Cardinal
$2,100,000. Bishop sold all the remaining inventory purchased from Cardinal in 2005 to unrelated
parties and 30 percent of the inventory purchased in 2006. Bishop sold inventory costing $950,000
to Cardinal for $1,350,000. Cardinal sold an additional 45 percent of the inventory purchased in 2005
and 20 percent of the inventory purchased in 2006.

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198 CHAPTER 4 INTERCOMPANY TRANSACTION

PROBLEM 4-6 Required:
PROBLEM 4-7 Prepare, in journal entry form, the worksheet eliminations needed to present the consolidated financial
statements at December 31, 2006.

(Refer to the information in Problems 4-4 and 4-5.) Net income and dividends paid by Bishop
Company are $5,200,000 and $3,450,000, respectively.
Cardinal sold inventory costing $3,100,000 to Bishop in 2007 for $3,900,000, while Bishop sold
inventory costing $1,300,000 to Cardinal for $1,550,000. Bishop sold an additional 60 percent of the
inventory purchased from Cardinal in 2006 to unrelated parties in 2007. In addition, Bishop also sold
90 percent of the inventory purchased from Cardinal in 2007 to unrelated parties. In 2007 Cardinal
sold the remaining inventory that had been purchased from Bishop in 2005 and 2006 to unrelated
parties. Cardinal also sold 70 percent of the inventory purchased from Bishop in 2007.

Required:
Prepare, in journal entry form, the worksheet eliminations needed to present the consolidated financial
statements at December 31, 2007.

Micro Techniques Corporation purchased 80 percent of Spreadsheet Development Company for
$830,000 on January 1, 2005. The balance sheets for Micro Techniques and Spreadsheet
Development and market value information at the date of acquisition are presented below.

Micro Techniques Spreadsheet

Book Value Market Value Book Value Market Value

Cash $ 210,000 $ 210,000 $ 110,000 $110,000
550,000 165,000 165,000
Receivables 550,000 725,000 340,000 370,000
850,000
Inventory 600,000 780,000

Investment in Spreadsheet 850,000 2,150,000

Land 675,000 1,250,000 300,000 350,000
800,000 680,000
Buildings 2,050,000 140,000 (175,000)
300,000 220,000
Accumulated Depreciation—Buildings (450,000) (90,000)

Equipment 1,400,000

Accumulated Depreciation—Equipment (300,000)

Patents 110,000

Total Assets $5,695,000 $1,750,000

Current Liabilities $ 625,000 $ 625,000 $ 275,000 $275,000
Bonds Payable 1,000,000 980,000 500,000 500,000
Discount on Bonds Payable
Common Stock (35,000) 225,000
Additional Paid-In Capital 750,000 325,000
Retained Earnings 1,660,000 425,000
1,695,000 $1,750,000
Total Liabilities and Equity $5,695,000

The estimated remaining life (in years) of each of the items with a purchase differential is listed
below.

Inventory Micro Spreadsheet
Land
Buildings 1 1
Equipment Indefinite Indefinite
Patents
Bonds Payable 12 8
10 4

5
5

On April 1, 2005, Micro sells equipment to Spreadsheet for $15,000. The equipment has a historical
cost of $24,000 and accumulated depreciation of $9,500 after recording the April 1 adjusting entry.

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PROBLEMS 199

The equipment has an estimated remaining life of 71⁄4 years when sold by Micro and an estimated
remaining life of 5 years by Spreadsheet. Straight-line depreciation is recorded on a monthly basis.
Abbreviated income statements for Micro Techniques and Spreadsheet for 2005 are provided below.

Sales Micro Spreadsheet
Cost of Goods Sold
$4,125,000 $950,000
Gross Profit 2,475,000 370,000
Depreciation Expenses 1,650,000 580,000
Other Expenses 300,000 105,000
250,000 175,000
Income Before Taxes 1,100,000 300,000
Income Taxes 180,000 90,000
$920,000 $210,000
Net Income

PROBLEM 4-8 Dividends in 2005 were $190,000 and $60,000 for Micro Techniques and Spreadsheet Development,
PROBLEM 4-9 respectively.
PROBLEM 4-10
Required:
Prepare, in journal entry form, the worksheet eliminations needed to present the consolidated financial
statements at December 31, 2005.

(Refer to the information in Problem 4-7.) On December 31, 2006, Spreadsheet sells equipment to
Micro Techniques for $20,000. This piece of equipment had an original cost of $32,000 and
accumulated depreciation of $9,600 at the date of sale (the adjusting entry has been made). The
equipment has an eight-year remaining life on December 31, 2006.
Micro Techniques’ net income and dividends paid during 2006 are $975,000 and $225,000, respectively,
while Spreadsheet’s net income and dividends paid are $300,000 and $100,000, respectively.

Required:
Prepare, in journal entry form, the worksheet eliminations needed to present the consolidated financial
statements at December 31, 2006.

(Refer to the information in Problems 4-7 and 4-8.) On September 30, 2007, Spreadsheet sells the
equipment acquired from Micro Techniques in 2005 to an unrelated party for $13,000. Net income
and dividends for Spreadsheet in 2007 are $375,000 and $115,000, respectively.

Required:
Prepare, in journal entry form, the worksheet eliminations needed to present the consolidated financial
statements at December 31, 2007.

Big Boat Manufacturing Corporation purchased 100 percent of LifeLine Incorporated on September
30, 2005, for $2,870,000. The balance sheet of LifeLine Inc. on that date follows.

Cash $ 195,000 Accounts Payable $ 300,000
Accounts Receivable 430,000 Notes Payable (short-term) 450,000
Inventory 720,000 Notes Payable (long-term)
Land 275,000 Common Stock 2,100,000
Buildings Additional Paid-In Capital 100,000
Accumulated Depreciation—Buildings 3,000,000 Retained Earnings
Equipment (600,000) 1,000,000
Accumulated Depreciation—Equipment 1,300,000 Total Liabilities and Equity 970,000
(400,000)
Total Assets $4,920,000 $4,920,000

Purchase differentials exist for two identifiable assets: inventory and buildings. The amounts of the
purchase differentials are $180,000 and $316,800, respectively. The remaining estimated life of the
inventory is four months and the buildings have an estimated remaining life of eight years.

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200 CHAPTER 4 INTERCOMPANY TRANSACTION

PROBLEM 4-11 LifeLine Inc. records net income of $125,000 for the last three months of 2005, and LifeLine pays
$25,000 of dividends quarterly (one dividend payment is declared and paid in 2005 after the
PROBLEM 4-12 acquisition).
PROBLEM 4-13 Big Boat sold precision machining equipment to LifeLine on December 1, 2005, for $12,240. This
equipment had a historical cost and accumulated depreciation, on the financial records of Big Boat,
of $15,000 and $4,200, respectively, after the adjusting entry at the time of sale. The machine had a
remaining estimated life of 10 years on Big Boat’s records at the time of the sale. The machine was
assigned an estimated life of 15 years when place on LifeLine’s financial records.

Required:
Prepare, in journal entry form, the worksheet eliminations needed to present the consolidated financial
statements at December 31, 2005.

(Refer to the information in Problem 4-10.) LifeLine Inc. reports net income of $550,000 and pay
dividends of $120,000 in 2006.
On December 31, 2006, Big Boat sold additional equipment to LifeLine for $62,400. This equipment
had a historical cost of $90,000 and accumulated depreciation of $25,200 on Big Boat’s books at the
date of the sale. In addition, Big Boat recorded depreciation expense of $13,000 in the year of the
sale. The machine had a remaining life of five years on Big Boat’s books and was assigned a life of
eight years by LifeLine.
LifeLine sold a storage building to Big Boat on March 1, 2006, for $408,000. The building had a his-
torical cost, accumulated depreciation, and estimated remaining life on LifeLine’s books of
$750,000, $301,200, and 17 years, respectively, at the time of the sale. Big Boat assigned the building
a life of 20 years.
LifeLine sold the equipment purchased from Big Boat on December 1, 2005, to an unrelated party
for $14,000 on October 31, 2006.

Required:
Prepare, in journal entry form, the worksheet eliminations needed to present the consolidated financial
statements at December 31, 2006.

(Refer to the information in Problems 4-10 and 4-11.) Net income and dividends paid by LifeLine
Inc. are $430,000 and $150,000, respectively.
LifeLine sold a machine to Big Boat on February 1, 2007. The machine had a remaining life,
historical cost, and accumulated depreciation on LifeLine’s financial records of six years, $45,000,
and $19,800, respectively, at the time of the sale. Big Boat placed the machine on its financial
records for $22,320 and assigned a five-year life to the machine.
On June 1, 2007, Big Boat sold the storage building purchased from LifeLine in 2006 for $500,000.

Required:
Prepare, in journal entry form, the worksheet eliminations needed to present the consolidated financial
statements at December 31, 2007.

Eastbrook Products acquired 100 percent of Westcott Enterprises’ stock on June 1, 2005, for
$59,384,000. Relevant balance sheet and market value information for Eastbrook and Westcott at the
date of acquisition are presented below.

Eastbook Products Westcott Enterprises

Book Value Market Value Book Value Market Value

Cash $22,750,000 $22,750,000 $ 8,285,000 $ 8,285,000
Receivables 73,500,000 73,500,000 5,450,000 5,450,000
Inventory 9,260,000
Investment in Westcott 151,600,000 180,250,000 11,600,000
Land 50,000,000 50,000,000
46,300,000 49,600,000 6,275,000 6,350,000

139-210.ch04rev.qxd 12/2/03 2:57 PM Page 201

PROBLEMS 201

Buildings (net) 123,600,000 124,800,000 16,900,000 19,300,000
Equipment (net) 42,900,000 50,640,000 8,125,000 10,375,000
Patents 3,264,000
$510,650,000 140,000,000 $54,295,000
Total Assets 201,200,000 $11,000,000 $11,000,000
$140,000,000
Current Liabilities 200,000,000 6,000,000
Bonds Payable 30,850,000
Premium on Bonds Payable 3,600,000
Common Stock 11,500,000 6,445,000
Additional Paid-In Capital 46,150,000 $54,295,000
Retained Earnings 109,400,000
Total Liabilities and Equity $510,650,000

The estimated remaining life (in months) at the date of acquisition for each of the items with a
purchase differential is listed below.

Inventory Eastbook Westcott
Land
Buildings 2 5
Equipment Indefinite Indefinite
Patents
Bonds Payable 144 120
180 150
204
240

On September 30, 2005 (four months after the acquisition date), Westcott purchased $5,000,000 of
Eastbrook’s outstanding Bonds Payable for $5,031,860. The carrying value (adjusted to September
30, 2005) of these bonds on Eastbrook’s financial records is $5,088,500. The premium on bonds is
amortized straight-line on the books of both companies. The stated interest rate on the bonds is 8
percent. Interest Revenue and Interest Expense recognized for October1–December 31 on the bonds
acquired by were $99,595 and $98,875, respectively.

Abbreviated income statements for Eastbrook and Westcott for June1–December 31, 2005 are
provided below.

Sales Eastbook Westcott
Cost of Goods Sold
$280,000,000 $38,000,000
Gross Profit 161,950,000 26,700,000
Depreciation Expenses 118,050,000 11,300,000
Interest Expense 12,530,000 2,400,000
Interest Revenue 15,820,000 650,000
Other Expenses 99,595
37,200,000 3,250,000
Income Before Taxes 52,500,000 5,099,595
Income Taxes 21,000,000 2,099,595
$31,500,000 $3,000,000
Net Income

Eastbrook and Westcott distributed $8,250,000 and $600,000, respectively, for dividends during
2005. Dividends are paid in equal amounts at the end of each quarter.

PROBLEM 4-14 Required:
Prepare, in journal entry form, the worksheet eliminations needed to present the consolidated financial
statements at December 31, 2005.

(Refer to the information in Problem 4-13.) No additional intercompany bond transactions occurred
during 2006.
Eastbrook’s net income and dividends paid during 2006 are $35,075,000 and $9,100,000, respectively,
while Westcott’s net income and dividends paid are $5,6000,000 and $3,360,000, respectively.

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202 CHAPTER 4 INTERCOMPANY TRANSACTION

Eastbrook had interest expense of $395,500 and Westcott had interest revenue of $398,380 related
to the bonds purchased by Westcott on its 2006 income statements.

Required:
Prepare, in journal entry form, the worksheet eliminations needed to present the consolidated financial
statements at December 31, 2006.

PROBLEM 4-15 (Refer to the information in Problems 4-13 and 4-14.) Westcott purchased another $12,000,000 of
Eastbrook’s outstanding bonds payable on April 30, 2007 for $12,299,460. The carrying value of the
bonds on that date would have been $12,195,300 if an adjusting entry had been recorded.
Eastbrook recognized net income (including interest expense of $395,500 for bonds purchased by
Westcott in 2005 and $632,800 for bonds purchased by Westcott in 2007) and paid dividends of
$28,000,000 and $9,750,000, respectively, for 2007. Westcott recognized $5,800,000 of net income
(including interest revenue of $398,380 for 2005 bonds and $628,960 for 2007 bonds). Westcott paid
dividends of $4,100,000 in 2007.

Required:
Prepare, in journal entry form, the worksheet eliminations needed to present the consolidated finan-
cial statements at December 31, 2007.

PROBLEM 4-16 Office Equipment Company purchased 80 percent of Home Copying Equipment, Incorporated on
January 1, 2005, for $25,997,160. The balance sheet of Home Copying Equipment on that date
follows.

Cash $ 3,390,000 Accounts Payable $ 1,674,000
Marketable Securities 1,050,000 Notes Payable (short-term) 2,100,000
Accounts Receivable 1,375,000 Notes Payable (long-term) 3,800,000
Inventory 2,650,000 Bonds Payable (12 percent)
Land 3,150,000 Premium on Bonds Payable 15,000,000
Buildings (net) Common Stock 205,800
Equipment (net) 15,600,000 Additional Paid-in Capital
Patents 8,750,000 Retained Earnings 3,000,000
6,880,000 10,340,200
Total Assets Total Liabilities and Equity 6,725,000
$42,845,000 $42,845,000

Purchase differentials exist for three identifiable assets: land, buildings, and patents. The amounts of
the purchase differentials applicable to Office Equipment’s ownership percentage are $675,000,
$2,150,000, and $4,540,000, respectively. The remaining estimated life of the buildings is 20 years
and the patents have an estimated remaining life of 8 years.

Home Copying Equipment records net income of $5,000,000 for 2005 and pays $400,000 of
dividends quarterly. Discounts and premiums are amortized using the straight-line method by both
organizations.

The treasurer of each company is responsible for keeping the cash resources of that organization
invested. Beginning in 2005, each organization began investing in the debt securities of the other
organization. On March 1, 2005, Office Equipment Company purchased $1,500,000 of the out-
standing Home Copying Equipment bonds payable for $1,548,000. The bonds have a remaining life
of eight years and a $1,520,160 carrying value on the books of Home Copying Equipment at the time
of the investment by Office Equipment. Home Copying recorded $147,900 interest expense on the
bonds purchased by Office Equipment for the remainder of the year and Office Equipment recorded
$145,000 interest revenue.

On September 30, 2005, Home Copying Equipment purchased $600,000 of the outstanding 10-
percent bonds payable of Office Equipment for $639,000. The bonds had a remaining life of five
years and a carrying value of $645,000 at the time of the investment. Home Copying Equipment
recognized $13,050 of interest revenue for these bonds in 2005 while Office Equipment recognized
$12,750 interest expense for the remainder of the year.

139-210.ch04rev.qxd 12/2/03 2:57 PM Page 203

PROBLEMS 203

PROBLEM 4-17 Required:
PROBLEM 4-18 Prepare, in journal entry form, the worksheet eliminations needed to present the consolidated financial
PROBLEM 4-19 statements at December 31, 2005.

(Refer to the information in Problem 4-16.) Home Copying Equipment reports net income of
$4,000,000 and pay dividends of $1,600,000 in 2006.
On June 1, 2006, Office Equipment purchased an additional $3,000,000 of Home Copying’s bonds
payable for $3,060,750. The bonds had a carrying value of $3,034,020 at the acquisition date. Home
Copying recorded $177,480 of interest expense related to the bonds purchased by Office Equipment in
2005 and $207,060 (for June 1–December 31) related to the 2006 purchase. Office Equipment recorded
interest revenue of $174,000 and $204,750 for the 2005 and 2006 bond purchases, respectively.

On October 31, 2006, Home Copying purchased an additional $960,000 of Office Equipment’s out-
standing bonds payable for $1,008,504. The bonds had a carrying value of $1,016,400 at the date of
the acquisition. Home Copying recognized interest revenue of $52,200 and $13,936 on the bonds pur-
chased in 2005 and 2006 (partial year), respectively. Office Equipment recognized interest expense on
these same bonds in the amounts of $51,000 and $13,600 for 2005 and 2006, respectively.

Required:
Prepare, in journal entry form, the worksheet eliminations needed to present the consolidated financial
statements at December 31, 2006.

(Refer to the information in Problems 4-16 and 4-17.) Net income and dividends paid by Home
Copying are $5,750,000 and $1,800,000, respectively.
On March 1, 2007, Office Equipment sold (to Home Copying) the $1,500,000 face value bonds
purchased in 2005 to provide cash for expanding plant facilities. The sales price on the bonds was
$1,490,000. Home Copying recognized interest expense for the 2005 and 2006 bond purchased
during the period held by Office Equipment in the following amounts: 2005, $29,580; 2006,
$354,960. Office Equipment’s financial records disclosed interest revenue in the amounts of $29,000
and $351,000 for the 2005 and 2006 bond investments, respectively.

Home Copying did not have any additional bond investments during 2007. Interest expense recognized
by Office Equipment on the bonds held by Home Copying during 2007 were $51,000 for the 2005
investment and $81,600 for the 2006 investment. Home Copying recognized interest revenue for
$52,200 and $83,616 for the 2005 and 2006 investments, respectively.

Required:
Prepare, in journal entry form, the worksheet eliminations needed to present the consolidated financial
statements at December 31, 2007.

Pleasure Company acquired 80 percent of the outstanding no par stock of Sorrow Company on
January 1, 2005, by issuing new shares of its common stock having a par value of $24,000 and
market value of $260,000. The premium over book value paid for the interest in Sorrow was due to
certain fixed assets that were undervalued plus unrecognized goodwill in Sorrow. Sorrow’s balance
sheet information at the date of the acquisition is provided below.

Cash and Receivables Book Value Market Value
Inventory (FIFO)
Plant and Equipment (net) $ 40,000 $40,000
Accumulated Depreciation 90,000 90,000
Patents
270,000 175,000
Total Assets (145,000)
Current Liabilities 75,000
Bonds Payable 75,000
Common Stock (no par) $330,000 30,000
Retained Earnings $ 30,000 50,000

Total Liabilities and Equities 50,000
130,000
120,000
$330,000

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204 CHAPTER 4 INTERCOMPANY TRANSACTION

Additional information:

1. The remaining useful life of the equipment having the market value in excess of book value is
five years.

2. During 2005 Sorrow reports $75,000 of net income and declares $45,000 of dividends.
3. Pleasure uses the equity method to account for the investment in Sorrow’s stock.
4. Intercompany transactions began immediately after the combination. The 2005 activities are

described here:

• On January 2, 2005, Pleasure sold equipment having a cost of $32,000 and accumulated depre-
ciation of $21,000 to Sorrow for $15,000 cash. The remaining useful life of that equipment was
four years at the date of sale. Schedules of depreciation over the remaining life of the equip-
ment are provided.

• Sorrow began selling inventory to Pleasure during 2005. Goods costing $28,000 were sold to
Pleasure for $42,000 in 2005. Pleasure resold 45 percent of those units to outside parties for a
total of $31,000 before December 31, 2005. A schedule of the intercompany inventory activity
is provided.

• Pleasure has 10 percent, 10-year bonds payable outstanding. Those bonds pay interest sem-
iannually on June 30 and December 31. The bonds were sold to yield 8 percent on January 1, 1998.
On July 1, 2005, Sorrow buys 20 percent of the bond issue in the open market for $37,767. Sorrow
was able to buy the bonds at a discount because market interest rates had risen to 12 percent. The
amortization schedules that result from the original price and the buyback price are provided.

Required:
A. Prepare, in journal entry form, all worksheet eliminations necessary to consolidate Pleasure and

Sorrow at December 31, 2005. Then post them to the worksheet provided at the end of this
problem (additional accounts will need to be added to complete the worksheet).
B. In 2006 Sorrow sold additional inventory to Pleasure. The cost of these items was $60,000 and
they were sold to Pleasure for $85,000. By the end of 2006, all the beginning intercompany
inventory and 75 percent of the new items acquired in 2006 from Sorrow had been sold to
unrelated entities. Prepare the worksheet eliminations that relate to the intercompany transactions
for Property, Plant, and Equipment; Inventory; and Bonds that would be necessary as part of the
December 31, 2006, consolidation of Pleasure and Sorrow.

Pleasure Company Bonds Payable amortization schedule:

Date Cash Interest Premium Carrying
Interest Expense Amortized Value
Issue date 1/1/1998
6/30/1998 $10,000 $9,087 $913 $227,181
12/31/1998 $10,000 $9,051 $949 $226,268
6/30/1999 $10,000 $9,013 $987 $225,319
12/31/1999 $10,000 $8,973 $1,027 $224,332
6/30/2000 $10,000 $8,932 $1,068 $223,305
12/31/2000 $10,000 $8,889 $1,111 $222,237
6/30/2001 $10,000 $8,845 $1,155 $221,127
12/31/2001 $10,000 $8,799 $1,201 $219,972
6/30/2002 $10,000 $8,751 $1,249 $218,771
12/31/2002 $10,000 $8,701 $1,299 $217,521
6/30/2003 $10,000 $8,649 $1,351 $216,222
12/31/2003 $10,000 $8,595 $1,405 $214,871
6/30/2004 $10,000 $8,539 $1,461 $213,466
12/31/2004 $10,000 $8,480 $1,520 $212,005
6/30/2005 $10,000 $8,419 $1,581 $210,485
12/31/2005 $10,000 $8,356 $1,644 $208,904
6/30/2006 $10,000 $8,290 $1,710 $207,260
12/31/2006 $10,000 $8,222 $1,778 $205,551
$203,773

(Continued)

139-210.ch04rev.qxd 12/2/03 2:57 PM Page 205

PROBLEMS 205

Date Cash Interest Premium Carrying
Interest Expense Amortized Value
6/30/2007
12/31/2007 $10,000 $8,151 $1,849 $201,924
$10,000 $8,077 $1,923 $200,001

Sorrow Company Investment in Bonds amortization schedule: Carrying
Value
Date Cash Interest Discount
Interest Revenue Amortized $37,767
$38,033
Investment date $2,000 $2,266 $266 $38,315
12/31/2005 $2,000 $2,282 $282 $38,614
6/30/2006 $2,000 $2,299 $299 $38,931
12/31/2006 $2,000 $2,317 $317 $39,267
6/30/2007 $2,000 $2,336 $336 $39,623
12/31/2007 $2,000 $2,356 $356 $40,000
6/30/2008 $2,000 $2,377 $377
12/31/2008 Retail Price
to Pleasure
Schedule of inventory transferred from Sorrow to Pleasure:
$0
2005 Transactions Cost Marlup on $44,000
Basis Transfers $24,200
$19,800
Beginning Inventory—at Pleasure $0 $0
2005—Sold to Pleasure $30,000 $14,000
Ending Inventory—at Pleasure $16,500 $7,700
Sold by Pleasure to third parties $13,500 $6,300

Schedule of depreciation and book values for intercompany fixed assets transferred:

Pleasure’s Expected Depreciation Sorrow’s Depreciation Schedule
Schedule Prior to Sale Subsequent to Sale

Depreciation Accumulated Depreciation Accumulated
Expense Depreciation Expense Depreciation

1/2/2005 $2,750 $21,000 $3,750 $0
12/31/2005 $2,750 $23,750 $3,750 $3,750
12/31/2006 $2,750 $26,500 $3,750 $7,500
12/31/2007 $2,750 $29,250 $3,750 $11,250
12/31/2008 $32,000 $15,000

Separate Financial Adjustments and Consolidated
Statements Eliminations Financial

Pleasure Sorrow Debit Credit Statements

Income Statement 601,000 322,000
Sales 2,266
Interest Revenue 4,000
Gain on Sale of Equipment 52,000 167,000
Investment Income 300,000 41,000
Cost of Goods Sold 88,000 38,266
Depreciation Expense 102,981 3,000
Operating Expenses
Patent Amortization Expense 17,019 75,000
Bond Interest Expense 149,000

Net Income (to Statement of Retained Earnings)

(Continued)

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206 CHAPTER 4 INTERCOMPANY TRANSACTION 280,000 120,000
149,000 75,000
Retained Earnings Statement 429,000
Retained Earnings (100,000) 195,000
Add: Net Income (from Income Statement) (45,000)
329,000
Subtotal 150,000
Less: Dividends
127,000 24,967
Retained Earnings (to Balance Sheet) 210,000 133,000
337,000 157,967
Balance Sheet 600,000 280,000
Cash and Receivables (347,000) (180,000)
Inventory
276,000 72,000
Total Current Assets
Plant and Equipment 529,000 38,033
Accumulated Depreciation 210,033
Patents 866,000 368,000
Investment in Sorrow Stock
Investment in Pleasure Bonds 76,516 38,000
200,000 50,000
Total Long-Term Assets
10,484 88,000
Total Assets 287,000 130,000
100,000
Current Liabilities 150,000 150,000
Bonds Payable 329,000 280,000
Premium on Bonds Payable 579,000

Total Liabilities 866,000 368,000
Common Stock
Additional Paid-In Capital
Retained Earnings

Total Stockholders’ Equity

Total Liabilities and Stockholders’ Equity

PROBLEM 4-20 Richmond Enterprises purchased 100 percent of the stock of Atlanta Products on January 1, 2005.
The acquisition price was $1,250,000. Book values, market values, and estimated remaining lives for
Atlanta on that date follow.

Book Value Market Value Estimated Life
(in Years)

Cash and Receivables $275,000 $275,000 1
Inventory 490,000 550,000 n/a
Land 300,000 325,000 15
Buildings (net) 650,000 800,000
Equipment (net) 200,000 248,000 8

Total Assets $1,915,000 $370,000 14
920,000
Current Liabilities $370,000
Mortgage Payable 850,000
Common Stock 100,000
Additional Paid-In Capital 265,000
Retained Earnings 330,000

Total Liabilities and Equity $1,915,000

139-210.ch04rev.qxd 12/2/03 2:57 PM Page 207

PROBLEMS 207

Richmond and Atlanta are involved in intercompany inventory transactions. The tables below pres-
ents the volume of intercompany transactions and the periods in which this inventory is sold to an
unrelated party for 2005, 2006, and 2007.

Intercompany Sales of Inventory

2005 2006 2007

Sales by: Market Book Market Book Market Book
Value Value Value Value Value Value
Richmond
Atlanta $95,000 $90,000 125,000 $100,000 $175,000 $160,000
$60,000 $56,000 $50,000 $45,000 $75,000 $68,000

Sales of Intercompany Inventory to Unrelated Parties

Percent Sold/Sales Price

Unrelated Party Sales: 2005 2006 2007

Sold by: Intercompany Transfer: 2005 2005 2006 2006 2007

Richmond 100% N/A 60% 40% 80%
Atlanta $69,000 $33,000 $24,000 $66,000
30%
70% $31,000 100% N/A 75%
$73,000 $137,000 $142,000

Atlanta had net income of $150,000, $180,000, and $140,000 for 2005, 2006, and 2007, respectively.
In addition, Atlanta paid dividends of $40,000, $45,000, and $48,000 in 2005, 2006, and 2007,
respectively.

Required:
Prepare, in journal entry form, the worksheet eliminations necessary to prepare the consolidated
financial statements in each of the three years.

PROBLEM 4-21 Argon Industries purchased 60 percent of the stock of Oxygen Gas Products, Incorporated on March
1, 2005, for $1,446,780. Book values, market values, and estimated remaining lives for Oxygen Gas
Product’s on that date follow.

Book Value Market Value Estimated Life
(in Months)

Cash and Receivables $ 50,000 $ 50,000 n/a
Inventory 250,000 250,000 180
Land 175,000 225,000
Buildings 800,000 550,000 96
Accumulated Depreciation—Buildings (475,000)
Equipment 400,000 180,000
Accumulated Depreciation—Equipment (280,000)

Total Assets $920,000

Current Liabilities $ 35,000 $ 35,000 140
Mortgage Payable 315,000 308,700
Common Stock 20,000
Additional Paid-In Capital 160,000
Retained Earnings 390,000

Total Liabilities and Equity $920,000

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208 CHAPTER 4 INTERCOMPANY TRANSACTION

Argon Industries and Oxygen Gas Products are involved in many transactions with each other. Below
is a table indicating sales of equipment between the two companies during 2005, 2006, and 2007.
Assume straight-line depreciation is recorded on a monthly basis with no salvage values for all plant
assets.

2005 2006 2007

Buyer Oxygen Argon Oxygen Argon Oxygen Argon
Seller Argon Oxygen Argon Oxygen Argon Oxygen

Date of Sale April 1 Dec. 31 Dec. 31 Oct. 1 May 1 Oct. 1
$27,000 $16,800 $4,900 $16,000 $32,760 $10,080
Sales Price
$500 $2,000 $420 $1,500 $1,120 $540
Year of sale
depreciation by $30,000 $15,500 $5,000 $24,000 $40,000 $10,000
seller $8,220 $3,500 $1,220 $4,000 $5,056 $1,360
6
Cost and Accumulated 4 13 12
Depreciation (seller) 14 20

Estimated Life (seller) 11 9 10

Estimated Life (buyer) 15 78

Date sold to unrelated April 1, 2007 Oct. 1, 2007
party and sales price $23,900 $13,000

Oxygen Gas Products had net income of $105,000, $130,000, and $152,000 for 2005 (March
1–December 31), 2006, and 2007, respectively. In addition, Oxygen paid dividends of $25,000,
$25,000, and $35,000 in 2005, 2006, and 2007, respectively.

Required:

A. Prepare, in journal entry form, the worksheet eliminations necessary to prepare the consolidated
financial statements in each of the three years.

B. Why are the equipment transactions that took place prior to the acquisition of Oxygen by Argon
not viewed as intercompany transactions?

PROBLEM 4-22 Baker Company purchased 60 percent of Muffin Mania, Incorporated on January 1, 2005, for
$948,000. Book values, market values, and estimated remaining lives for Muffin Mania on that date
follow.

Cash and Receivables Book Value Market Value Estimated Life
Inventory (in years)
Land $103,720 $103,720
Buildings (net) 210,000 230,000 1
Equipment (net) 250,000 300,000 n/a
550,000 680,000 13
315,000 355,000
8
$1,428,720

Current Liabilities $147,440 147,440 10
Bonds Payable 300,000 281,280
Discount on Bonds Payable (18,720)
Common Stock 150,000
Additional Paid-In Capital 275,000
Retained Earnings 575,000

$1,428,720

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PROBLEMS 209

Muffin Mania had net income of $175,000, $215,000, and $250,000 for 2005, 2006, and 2007,
respectively. In addition, Muffin Mania paid dividends of $60,000, $70,000, and $80,000 in 2005,
2006, and 2007, respectively.
Baker Company began purchasing the bonds of Muffin Mania as an investment soon after the acqui-
sition. The stated interest rate on Muffin Mania’s bonds is 9 percent and the discount on bonds
payable is amortized using the straight-line method. The table below presents the indirect intercom-
pany debt purchases by Baker Company in 2005, 2006, and 2007 and the sale of debt instruments to
Muffin Mania in 2006.

2005 2006 2007

Date of purchase May 1, 2005 Oct. 1, 2006 Mar. 1, 2007
Purchase price $44,780 $96,337 $69,924
Face value of bonds $50,000 $100,000 $75,000

purchased $46,984 $94,852 $71,334
Book value of bonds
$3,208A $4,411B $15,639C
purchased
Intercompany $3,360D $4,461E $15,609F

interest expense* June 1, 2006
Intercompany
$48,500
interest revenue*
Date sold to Muffin

Mania
Sales price

* Supplemental supporting interest expense and interest revenue calculations.

Interest Expense = [(face value of debt × stated interest rate) + (discount amortization)] (fraction of year inter-
company) (fraction of total bond intercompany).

2005: On bonds purchased by [($300,000 × .09) + ($18,720/10)] 2,005 $3,208A
2006: Baker in 2005 (8/12) (1/6) 2,406 $4,411B
On bonds purchased 9,624 $15,639C
2007: by Baker in 2006 [($300,000 × .09) + 6,015
($18,720/10)] (5/12) (1/6)
On bonds purchased by [($300,000 × .09) +
Baker in 2006 ($18,720/10)] (3/12) (1/3)
On bonds purchased by
Baker in 2007 [($300,000 × .09) +
($18,720/10)] (12/12) (1/3)
[($300,000 × .09) +
($18,720/10)] (10/12) (1/4)

Interest Revenue = [(face value of debt x stated interest rate)/12 + (monthly discount amortization)] (number
of months held)

2005: [($50,000 × .09)/12 + $3,360D
2006: ($5,220/116)] (8)
On bonds purchased by 2,100
Baker in 2005 [($50,000 × .09)/12 +
On bonds purchased by ($5,220/116)] (5) 2,361 $4,461E
Baker in 2006 [($100,000 × .09)/12 +
($3,663/99)] (3)

(Continued)

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210 CHAPTER 4 INTERCOMPANY TRANSACTION

2007: On bonds purchased [($100,000 × .09)/12 + 9,444
by Baker in 2006 ($3,663/99)] (12) 6,165
On bonds purchased [($75,000 × .09)/12 + $15,609F
by Baker in 2007 ($5,076/94)] (10)

Required:
Prepare, in journal entry form, the worksheet eliminations necessary to prepare the consolidated
financial statements in each of the three years.